Total

The European market was again dominated by intense competition in the reporting year. We met this challenge successfully thanks to our convergent product portfolio MagentaOne, recording a strong increase of around 58.5 percent in our FMC customer base as of December 31, 2017. Our TV business has also established itself as a consistent revenue growth driver. In the mobile communications business, we recorded a year-on-year increase in the number of high-value contract customers of 4.8 percent to 25.5 million. We are systematically driving forward the roll-out of fast, fiber-optic lines (FTTH, FTTB, and FTTC) in the fixed network. As part of our pan-European network strategy, we also increased the number of IP lines – primarily thanks to the migration from traditional PSTN lines to IP technology.

Mobile communications

As of the end of December 2017, we had a total mobile customer base of 48.8 million – up by 1.9 percent compared with 2016. The rise was attributable to the positive trend in the high-value contract customer business, especially at our national companies in Poland, Hungary, and the Czech Republic. Overall, we recorded growth in the number of contract customers of 4.8 percent or some 1.2 million net contract additions; thus the growth trend continues. At the end of the reporting year, contract customers accounted for 52.2 percent of the total customer base. Thanks to our continued build-out of our mobile networks with 4G/LTE technology, our customers enjoy better network coverage with fast mobile broadband. As of December 31, 2017, we already covered 94 percent of the population in the countries of our operating segment with LTE, reaching around 106 million people in total. The high level of data volumes used as well as the sales figures for mobile devices prove that our customers actually use these high bandwidths: At the end of December 2017, smartphones accounted for 81 percent of all mobile terminal equipment sales, a further increase against the prior year. This enabled us to entirely offset customer losses in the prepay business. The effects of regulatory prepay registration requirements in Poland had a negative effect on customer development. We recorded a return to slight growth in prepay customers from the third quarter of 2017 compared with the prior quarter.

Fixed network

Our TV and Entertainment offers generated positive impetus again in the reporting year: The number of TV customers grew by 4.8 percent compared with the end of 2016 to 4.2 million, with the majority of the net customer additions – 195 thousand – at our national companies in Hungary, Slovakia and Greece.

Our convergence product portfolio, MagentaOne, is available to our customers in all of our integrated countries. By December 31, 2017, we had already gained 2.2 million FMC customers in total, with demand rising substantially in Greece in particular. We have been increasingly successful in marketing our MagentaOne Business product to business customers. A simplified and standardized network based on IP technology provides the technical underpinnings of FMC products. Overall, we have converted five of our national companies to IP technology. As of December 31, 2017, we recorded 5.7 million IP-based lines – up 14.3 percent compared with the prior year. IP lines accounted for around 67.9 percent of all fixed-network lines. The number of fixed-network lines in our Europe operating segment decreased slightly compared with 2016 to 8.4 million as of the end of the reporting year.

The number of retail broadband lines increased by 4.7 percent to 5.6 million overall, with fiber-optic-based lines accounting for the majority of net customer additions, once again growing considerably faster than DSL business. Romania, Hungary, and Slovakia were the main contributors to this growth. We continued to increase our overall fiber-optic coverage, with our national companies reaching around 32 percent of households as of December 31, 2017. This success bears out our continued investment in forward-looking, fiber optic-based technologies.

DEVELOPMENT OF OPERATIONS

millions of €

2017

2016

Change

Change %

2015

Total revenue

11,589

11,454

135

1.2

11,674

Greece

2,846

2,883

(37)

(1.3)

2,878

Romania

972

985

(13)

(1.3)

984

Hungary

1,808

1,673

135

8.1

1,848

Poland a

1,509

1,488

21

1.4

1,544

Czech Republic

1,011

959

52

5.4

958

Croatia

955

925

30

3.2

909

Slovakia

748

766

(18)

(2.3)

783

Austria

900

855

45

5.3

829

Other b

1,069

1,132

(63)

(5.6)

1,155

Profit from operations (EBIT)

462

1,184

(722)

(61.0)

1,342

EBIT margin %

%

4.0

10.3

11.5

Depreciation, amortization and impairment losses

(3,157)

(2,589)

(568)

(21.9)

(2,395)

EBITDA

3,619

3,773

(154)

(4.1)

3,737

Special factors affecting EBITDA

(130)

(93)

(37)

(39.8)

(207)

EBITDA (adjusted for special factors)

3,749

3,866

(117)

(3.0)

3,944

Greece

1,135

1,120

15

1.3

1,118

Romania

166

175

(9)

(5.1)

205

Hungary

545

539

6

1.1

526

Poland a

419

482

(63)

(13.1)

580

Czech Republic

406

400

6

1.5

390

Croatia

386

374

12

3.2

367

Slovakia

315

302

13

4.3

296

Austria

266

258

8

3.1

259

Other b

110

215

(105)

(48.8)

202

EBITDA margin (adjusted for special factors) %

%

32.3

33.8

33.8

Cash Capex

(1,874)

(2,600)

726

27.9

(1,469)

The contributions of the national companies correspond to their respective unconsolidated financial statements and do not take consolidation effects at operating segment level into account.

a The business of T-Systems Polska Sp. z o.o., which was previously organizationally assigned to the Systems Solutions operating segment, is now disclosed under the Europe operating segment as of September 1, 2017. Figures for prior periods were not adjusted.b “Other”: national companies of Albania, the F.Y.R.O. Macedonia, and Montenegro, as well as ICSS (International Carrier Sales & Solutions), the ICSS business of the local business units, GTS Central Europe group in Romania, and Europe Headquarters.

Total revenue

Our Europe operating segment generated total revenue of EUR 11.6 billion in the reporting year, a slight year-on-year increase of 1.2 percent. Revenue was 0.5 percent up on the prior-year figure in organic terms, i.e., assuming constant exchange rates and the same organizational structure.

Our national companies increased their revenues from growth areas by a substantial 11.0 percent in 2017, with growth areas accounting for around 33 percent of total segment revenue. Mobile data business made a key contribution to this, growing by 17.2 percent to EUR 1.6 billion. All of the countries in our operating segment contributed to this success, in particular Poland, Hungary, Greece, and Austria. Thanks to our innovative TV and program management, the uptrend continued in TV and broadband business, with TV revenue rising by 6.9 percent to EUR 498 million and broadband revenue rising by 2.9 percent to EUR 711 million in the reporting year. Our B2B/ICT business customer operations also recorded a year-on-year increase in revenues in 2017, mainly thanks to the particularly strong results with ICT solutions in Europe, primarily in Hungary. Thanks to our innovative and future-oriented business solutions we also recorded double-digit growth rates in revenue from cloud business and from convergent solutions for the SMEs (MagentaOne Business). We laid important groundwork in the reporting year to firmly establish ourselves as a preferred digitalization partner for customers.

In addition, we recorded higher revenue from terminal equipment sales and visitors (revenues with third parties from roaming in our home networks). This offset the overall revenue decline at segment level, which was primarily attributable to voice telephony. From a country perspective, Hungary, Austria, the Czech Republic, and Croatia made the biggest contributions to the organic development of revenue in the reporting year, offsetting declining revenue from Greece, Slovakia, Poland, and Romania in particular, as well as from international wholesale business. Intense competition on the telecommunications markets as well as lower roaming charges in many countries of our operating segment had a negative impact on our organic revenue.

EBITDA, adjusted EBITDA

Our Europe operating segment generated adjusted EBITDA of EUR 3.7 billion in the reporting year, a year-on-year decrease of 3.0 percent. In organic terms, i.e., assuming constant exchange rates, and adjusted for the internal reallocation to the new Board of Management department Technology and Innovation, adjusted EBITDA declined only slightly by 1.0 percent.

The positive revenue effect was offset by higher market investments and revenue-related cost increases in B2B/ICT business customer operations, among other factors. By contrast, increased cost efficiency had a positive effect on adjusted EBITDA at segment level. From a country perspective, the slight decline in organic adjusted EBITDA is primarily attributable to developments at our national companies in Poland, Romania, and Albania. In Poland in particular, the decrease in revenue from the smaller customer base resulting from the prepay SIM registration requirement and intense competition had a negative effect on adjusted EBITDA. Regulatory effects, such as the reduction in EU roaming surcharges and interconnection rates, as well as higher market investment costs also reduced adjusted EBITDA. These developments were contrasted by increases in adjusted EBITDA in Greece, Slovakia, Croatia, and Austria in particular. Adjusted EBITDA was also impacted by decisions by regulatory authorities and the introduction of special taxes.

Our unadjusted EBITDA decreased by 4.1 percent year-on-year to EUR 3.6 billion, due in part to the decline in adjusted EBITDA, and in part to an increase in negative special factors. In organic terms, EBITDA decreased by 2.0 percent.

Development of operations in selected countries

Greece. At EUR 2.8 billion, revenue in Greece was only slightly down against 2016. We performed well in the fixed-network business, with increased revenues from broadband and TV business as well as with our exclusive TV content. Revenue in the B2B/ICT business also performed well. However, we were not able to entirely offset the negative effects from the wholesale business and voice telephony. Mobile revenues were slightly up year-on-year, with rising revenues from mobile data services and visitors more than offsetting the primarily price-driven decline in revenue from voice telephony.

In 2017, adjusted EBITDA in Greece increased slightly year-on-year by 1.3 percent to EUR 1.1 billion. Thanks to increased cost efficiency, we more than offset the decline in revenues.

Hungary. In Hungary, revenue grew by 8.1 percent compared with the prior year to EUR 1.8 billion. In organic terms, it increased by 7.4 percent. This growth was driven by the fixed-network business with clear revenue growth in the B2B/ICT business customer operations. TV business also made a positive contribution to total revenues, as did our FMC offering MagentaOne for consumers and business customers. In mobile business, revenue from mobile data services increased by 23.5 percent compared with the prior year. Revenue from terminal equipment sales also increased significantly, more than offsetting the decline in voice revenue. Our high-speed, high-reach mobile network also contributed to the positive trend in mobile business.

Austria. In Austria, we generated revenue of EUR 900 million in the reporting year, up 5.3 percent compared with the prior year. This was mainly attributable to the mobile data business which saw a further rise in volume and accounted for a share of total revenue of around 33 percent. Higher voice and visitor revenues and a one-time effect from the first quarter of 2017 also positively influenced the revenue trend. Overall, these positive effects more than offset the decrease in revenue from text messaging services and from sales of mobile terminal equipment.

The revenue trend is also evident in the increase in adjusted EBITDA by 3.1 percent to EUR 266 million in 2017.

EBIT

EBIT in our Europe operating segment decreased by 61.0 percent in 2017 to EUR 0.5 billion. In addition to the decline in EBITDA, this was primarily due to the EUR 0.6 billion increase in depreciation, amortization and impairment losses - in particular from the impairment of goodwill and property, plant and equipment amounting to EUR 0.9 billion resulting from the year-end impairment tests in Poland, Albania, and Romania. In the prior year, impairment losses on goodwill and on property, plant and equipment, primarily in Romania, reduced EBIT by EUR 0.2 billion overall.

Cash Capex

In the reporting year, our Europe operating segment reported cash capex of EUR 1.9 billion. The decline of EUR 0.7 billion was primarily due to the acquisition of mobile licenses in Poland in the prior year. In 2017, we acquired a small amount of mobile spectrum in Greece. Excluding the effects from the acquisition of spectrum, cash capex increased by 11.8 percent compared with 2016 at segment level. As part of our integrated network strategy, we made significant investments in the broadband and fiber-optic roll-out, our IP transformation, and our mobile infrastructure.